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How to Invest Around the Unicorns

October 17, 2017, 10:00 am

Buzz around streaming music service Spotify trying to walk in Alphabet’s (GOOGL) shoes by skipping the conventional IPO process has investors once again dreaming of catching other privately-held “unicorn” companies through a back door – names like Dropbox, Space-X, Airbnb and mighty Uber, which is already a $60 billion behemoth purely on private backing.

There’s still no way to get direct access to Silicon Valley’s highest-profile disruptors unless you’re a private equity partner or know the founders personally. And because these are the disruptive forces in today’s economy, it doesn’t make a lot of sense to own their publicly-traded competitors. This isn’t the kind of tide that lifts all the boats.

Instead, one option is to invest in the companies that sell these unicorns what they need and flourish in their footprint. Let’s take a look at a few.

Uber has frustrated everyday investors for years by teasing an IPO without ever following through. The platform was a black box until recently, when it has started to open up. Uber’s delivery service is a windfall for small business – represented through Shopify (SHOP) – and local florists. 1-800-Flowers (FLWS) is going to save a lot of money converting delivery staff into Uber drivers.

Moving deeper into the ecosystem, Uber is probably the best thing to happen to the car rental chains in years. Thousands of eager drivers are sidestepping the old expectation of buying their black town cars and SUVs, opting instead to rent by the hour. I don’t really see Hertz (HTZ) and Avis (CAR) as good long-term buys right now, but this movement has helped both stocks weather what would have otherwise been a nasty secular trend. Either way, the Uber app supports Pandora (P) streaming music so more cars on the road are a competitive win for that channel and not Apple (AAPL).

Airbnb is a tougher nut to crack since most of its partnerships actually feed cash back into it in the form of pay-for-play discounts and customer perks. Until we see something the rent-your-apartment company needs badly enough to push the money out instead of in, this one’s more of a reason to short conventional trip booking stocks and hotel chains hurting for business. Likewise, while the market is buzzing around Spotify right now, its deals with airlines and credit card companies point the wrong way to make those stocks a good proxy. (Yes, Uber drivers can play Spotify too, but it doesn’t help us to chase one unicorn to capture another’s success.)

Elon Musk’s “other company,” Space-X, has a $20 billion valuation and arguably even deeper pockets. It may never go public, but as its rocket platform gets more robust it takes a lot of pressure off satellite operators like Iridium Communications (IRDM). Everyone argues that orbital launch capacity at an economically-viable price is a strategic necessity for everything from GPS-enabled drones to missile defense, but unless Musk can pull that off, growth opportunities for IRDM and company look constrained at best.

WeWork hasn’t gotten quite as much press, but I think its update on the old “office incubator” model may ultimately be more interesting. Renting physical work space to virtual start-ups and other companies has already earned it a $20 billion valuation. When those millennials sit down at their desks for the day, their screens will run software from the giants – no real game changer for Microsoft (MSFT) or Salesforce.com (CRM) – but customer support from Zendesk (ZEN) is also on the menu. And because that company is more of an upstart, it’s probably the best way to play every warm body WeWork can squeeze into its offices.

Speaking of giants, Dropbox fans often use publicly-traded Box (BOX) as a proxy while they’re waiting for the IPO. I don’t think that’s the way to go, though: cloud storage is becoming the new status quo, but there will be winners and losers that a vendor-neutral portfolio won’t capture. Amazon (AMZN) is the only real angle here, as it runs the servers in which your cloud data lives. It’s not exactly a pure play, but the correlation does line up.

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